Professional Documents
Culture Documents
RECEIVABLE--------------------------------------------------------------------------------------------------
Receivable------------------------------------------------------------------------------------------------------------
------
→ financial assets that represent contractual rights to receive cash or other financial asset from another
entity.
Trade Receivables – claims arises from sale of goods or services in the ordinary course of business
→ classified as current assets (expected to be realized in cash within one year or within the normal
operating cycle, whichever is longer)
two major types:
- Loan Receivable (loans extended by financial institutions) --- also supported by promissory
notes
- Advances (officers and employees--NC, suppliers--C, and affiliates--NC)
- Accrued Income (income earned but not yet collected: interest income, dividend income) ---
C
- Creditor’s account with debit balance—receivable---C
- Deposits (reimbursable deposits paid: to cover potential damages or losses, for guarantee of
performance or payment, for returnable items) ---NC
- Claims Receivable (carriers for damaged/loss goods; supplier for returned or damaged
goods) ---C
- Subscription receivable
Financial Statement
Presentation----------------------------------------------------------------------------------------
→ Trade and non-trade receivables that are currently collectible are combined and presented on the
statement of financial position in a single line item as “Trade and other Receivables”
Note:
Abnormal Balances in
Accounts-----------------------------------------------------------------------------------------
→ for abnormal balances, adjustment is needed to eliminate it prior to the preparation of fs
o Credit balance in Accounts Receivable
resulting from overpayments, advances, or errors
presented as current liabilities and not offset against receivables
Example:
ABC Co. has an outstanding receivable of 10,000 from Customer A.
Customer A remits 16,000 (payment for the existing Accounts Receivable Customer-A
receivable and the excess as advance payment. beg. bal. 10,000 16,000 collection
Note: Accounts in the Subsidiary Ledger are credited for all cash receipts regardless of whether the cash
receipt is for the collection of recorded receivables or as an advance payment.
Note: Accounts in the Subsidiary Ledger are debited for all cash payments regardless of whether the cash
payment is for the settlement of recorded payables or as an advance payment.
Additional Info:
Identification of abnormal balances in accounts is part of audit procedures
Scanning (analytical procedure where accounts are scanned for abnormal balances)
Computer Assisted Audit Techniques (CAATs) ---app that identifies abnormal balances
Valuation and Classification of
Receivables--------------------------------------------------------------------------
Initial Measurement – initially recognized at fair value plus transaction costs
Subsequently – measured at amortized cost
Accounts
Receivable----------------------------------------------------------------------------------------------------
→ measured initially at face value/ original invoice price
→ subsequently measured at net realizable value / recoverable amount (amount of cash the entity actually
expects to collect from the receivables) --- by deducting allowances from the gross accounts receivable
Accounts Receivable xx
Less: Allowance for sales discount xx
Allowance for sales return and allowances xx
Allowance for freight xx
Allowance for bad debts xx
Net Realizable Value xx
o Sales Discount
- Trade Discounts – given to encourage orders in large quantities or to alter prices , deducted
from the list price to determine the invoice price (not recorded by either the buyer or seller)
- Cash Discounts – given to encourage prompt payment, deducted from the invoice price
o Sales return and allowances
o Freight
- FOB Destination (seller) --- record sale and A/R when the buyer received the goods
- FOB Shipping Point (buyer) --- record sale and A/R upon shipment
Gross Method (accounts receivable and sales are initially recorded at amounts gross amount)
Net Method (accounts receivable and sales are initially recorded at net amounts immediately)
Cash xx Cash xx
Sales Discount xx Accounts Receivable xx
Accounts Receivable xx
To record Collection beyond the discount period To record Collection beyond the discount period
Cash xx Cash xx
Accounts Receivable xx Accounts Receivable xx
Sales Discount Forfeited xx (other
income)
Allowance Method
allowance is recognized for bad debts expense when the accounts becomes doubtful or
questionable
when an account is determined to be uncollectible, the accounts are written off
Note: Write off---reduce the gross carrying amount of receivables when it has no reasonable
expectations of recovering.
To record recovery (accounts collected after the write-off), reverse the write-off entry and
record collection
Note: The allowance account is credited instead of accounts receivable because the entity does not
actually know which specific accounts are uncollectible and besides the amount involved is only an
estimate.
Cash xx Cash xx
Accounts Receivable xx Accounts Receivable xx
Note: Ending balance of AFDA = DAE+ Unadjusted AFDA (Beg AFDA – Write-offs + Recoveries)
b. Percentage of Receivable
Financial Position Approach
Required Balance of Allowance for Doubtful Accounts is computed
Note: Required Balance – Unadjusted Carrying Amount of AFDA (before recognizing DAE) = DAE
c. Aging of Receivable
Financial Position Approach
Required Balance of Allowance for Doubtful Accounts is computed by applying various
estimated percentages
Receivables are classified into not due or past due (period beyond the maximum credit term)
Note: Required Balance – Unadjusted Carrying Amount of AFDA (before recognizing DAE) = DAE
Percentage Computation
Combination of
Methods---------------------------------------------------------------------------------------------------------
Classification of Bad
Debts-------------------------------------------------------------------------------------------------------
presented in the income statement and other comprehensive income (function of expense
method)
as administrative expense (credit granting and collections of accounts is separated from selling
expense)
Note: Write-offs and provision of DAE – authorized by the management and treasurer (credit
department)
DAE – recognized periodically and part of regular expenses (not losses in the FS)
However, material write-downs of A/R should be presented as losses
Debit Balance in
AFDA------------------------------------------------------------------------------------------------------
→ when the amount needed to be written-off exceeds the existing balance of the allowance
→ adjusting entry is needed to eliminate the abnormal balance (Dr DAE and Cr AFDA)
Receivables dominated in foreign currency
initially translated at the exchange rate at the date of transaction
subsequently translated at the exchange rate at the end of accounting period
adjustments for changes in exchange rates are recognized in profit or loss as foreign exchange
gain or loss (sales revenue on receivables are not adjusted)
Risk of Accounting loss or Off-balance sheet risk
Risk of Accounting Loss → risk that the carrying amount of a recognized asset will not be recovered
Ex.
A/R – 100,000
AFDA – 20,000 --- (100k – 20k) = 80k --- Risk of Accounting Loss
Off-balance Sheet Risk → potential loss that may exceed the amount recognized as an asset
Ex.
Total Potential loss: 120,000
Less: Carrying A/R: 80,000
Off Balance Sheet Risk: 40,000
Note: Possible losses but not probable are normally not recognized but rather disclosed only.
NOTES
RECEIVABLE---------------------------------------------------------------------------------------------------------
Promissory Note
→ unconditional promise in writing made by one person to another to pay on demand or at a fixed
determinable future time, a sum of certain money to order or bearer
Negotiable Instruments Law – a note can be transferred or sold to another person or a bank which is not
a party to the original loan
Two parties involved in Promissory Note:
o Maker (who signs and promises to pay the amount required in the instrument)
o Payee (the person to whom the promise is made and to whom the instrument is payable)
may either be interest-bearing note (principal amount to be paid at maturity date plus interest at a
specified date) or non-bearing note (does not specify interest rate but the face amount already
includes the interest charge)
Essential Elements
Maker
Payee
Principal/Face Value (amount appearing on the face of the note --- amount borrowed)
Simple Interest Rate (annual rate of interest --- basis for interest charges)
Term (period of time which interest should be computed)
Issue date (date when the note was signed and issued)
Maturity date (date when maturity value should be paid)
Receivable Financing
→ the capability or financial flexibility of the company to generate cash out of its receivable
Common forms of Receivable Financing
1. Pledging (hypothecation) → receivables in general (no specific receivable is stated in the loan
contract) are used as collateral securities for loans
does not qualify as transfer of financial asset (the borrower retains control over the pledged
receivables)
treated as secured borrowing
lender may hold any of the borrower’s receivables as collateral security
not derecognized
Note: No changes in Accounting pertaining to Receivables – treated as normal receivable
Loan Transaction:
Note: Only the loan transaction is recorded. NO ENTRY is made for the pledged receivables.
(only a note disclosure is necessary)
2. Assignment → more formal borrowing arrangement in which specific receivables used as collateral
are identified and stated in the loan contract
lender may only hold as collateral security the specific receivables assigned
transfer of financial asset that does not qualify for derecognition (assignor retains control
over the receivable transferred)
evidence by financing agreement and promissory notes
Note: An entry is needed to specifically identify the assigned receivables from other receivables; as
“Receivables – Assigned”
Characteristics of Assignment
The loan is at specified percentage of the face value of the collateral. Interest and service fee
are charged to the assignor.
Notification basis – occasionally, debtors whose receivables have been assigned are notified to
the assignment.
Debtors will remit payments not to the assignor but the assignee (assignee will inform the
assignor of collections made)
Non-notification basis – mostly, debtors whose receivables have been assigned are not notified
to the assignment.
Debtors will remit payments to the assignor
Assigned accounts are segregated from other accounts. To determine the equity in assigned A/R
(A/R-assigned – Loans Payable)
Pro-forma Entries
Factor’s holdback
With or without recourse, the transferor is responsible for any reduction in the collection (sales
returns, discounts, and allowances)
Transferor records this under the “Factor’s holdback” account or “Receivable from Factor”
(the factor records a corresponding liability for the holdback)
Cash xx
Allowance for Doubtful Accounts xx
Loss on Sale of Receivables (interest and service fee) xx
Receivable from factor xx
Accounts Receivable xx
Receivable from Factor
Cash xx
Receivable from factor xx
With recourse
(if gabayad) xx
Recourse Liability
Gain on Sale of Receivable xx
Cash xx
Allowance for Doubtful Accounts xx
Interest Expense xx
Factoring Fee xx
Receivable from factor xx
Accounts receivable xx
Cash xx
Receivable from factor xx
With recourse
4. Discounting of Notes Receivables → sale of the note to other party usually a bank.
- Usually with recourse basis (notification basis)
Formula:
(amount received from the discounting of notes)
Net Proceeds = Maturity Value - Discount
Maturity Value = Principal + Interest
Interest = Principal x Rate x Time (from date of the note to maturity date)
Discount = Maturity Value x Discount rate (bank’s rate) x Discount Time (from discount date to
maturity date)